Time Warner and Bronfman Leave EMI Out in the Cold

By HEATHER TIMMONS

Published: November 25, 2003

LONDON, Nov. 24—
Time Warner's agreement to sell its music business to Edgar Bronfman Jr. and a group of investors prompted the EMI Group to withdraw its offer for part of the division on Monday, leaving EMI without a partner at a time when industry profits are shrinking and two of its largest competitors plan to join forces.

EMI had been negotiating with Time Warner for nine weeks and was optimistic about its prospects as late as the middle of last week. But the company conceded defeat Monday, just hours before Mr. Bronfman's group said it would buy Time Warner's entire music unit for $2.6 billion, more than twice the cash EMI was offering for the recorded music group alone.

''It is no longer possible to reach an agreement on terms which would be acceptable to both parties and in the interests of EMI's shareholders,'' EMI's chairman, Eric Nicoli, said in a statement released to the London Stock Exchange on Monday morning. This is the third time that EMI, which has the rights to acts like the Rolling Stones and Kylie Minogue, has tried and failed to reach a deal.

Executives close to EMI say that the company has not yet ruled out the possibility of merging with a rival and that EMI managers are closely watching the negotiations between Sony and Bertelsmann, who said this month that they planned to combine their music units. Both outside analysts and people inside EMI are skeptical that the Bertelsmann and Sony tie-up will succeed. EMI could approach Bertelsmann if the negotiations between it and Sony break down, according to two people close to EMI's top management.

There are some indications that the Sony-Bertelsmann combination is not going smoothly. On Nov. 19, Bertelsmann's chairman, Gerd Schulte-Hillen, stepped down unexpectedly after a disagreement with shareholders and other board members about the sale of the music group.

Losing the Time Warner deal is still a big disappointment for EMI, analysts said. EMI's most recent negotiations with Time Warner cooled when Sony and Bertelsmann publicized their intention to combine their music groups. Music industry regulators would be likely to approve one such combination, but not a second, analysts said.

EMI has long insisted that it does not need to merge to be successful, and the company reported stronger half-year profits than the rest of the industry this month. But analysts said there was no guarantee EMI could maintain that performance.

''Going into next year, it's difficult to see what competitive advantages they have to increase market share,'' said Jesper Jensen, an analyst with Panmure in London. ''It's all down to a good release schedule.''

Even if earnings falter, EMI is an unlikely takeover candidate for a private equity group, analysts say. Private equity buyers often look for low-debt companies that are overspending, then they cut costs to increase earnings.

EMI has neither of those selling points. The company's debt ratio, at three times Ebitda -- or earnings before interest, tax, depreciation and amortization -- has pushed it into junk status, while stringent cost-cutting over the last 12 months sliced most of the company's unprofitable artists and unnecessary overhead, leaving little room for more cuts.